1

The Speed of Learning about Firms Profitability and their Price Multiples: A
Global Perspective

PANKAJ K. JAIN AND UDOMSAK WONGCHOTI*

Abstract
This paper is an application of learning models in valuation of stocks listed on 52
international stock exchanges. We present direct evidence of declining analyst forecast errors
and return volatility with advancement in a firms age in the context of a learning model.
Consistent with a relatively new theory of learning and unlike the traditional focus of asset
pricing models on the discount rate in denominator, we find support for the notion that this
reduction in uncertainty about a firms prospects affects the expected value of cash flows in the
numerator of the valuation equation. This results in an inverse and convex relation between a
firms age and its market-to-book ratio. The valuation effects of learning are pervasive over time
and across countries, and are stronger for firms that do not pay dividends. We also find that the
speed of learning about firms profitability and its impact on valuation varies in economies with
diverse market designs and legal frameworks. Forecast errors are lower with strict enforcement
of laws prohibiting insider trading, higher feasibility of short selling, and dominance of local
versus foreign investors. These features also increase the learning speed and fuel quicker
achievement of long run equilibrium valuations.
JEL Classification Codes: G12, G14, G15

Key Words: Market to book ratio




______________________
* Jain is from Fogelman College of Business and Economics, The University of Memphis, USA and Wongchoti is
from Massey University, Palmerston North, New Zealand. Please send correspondence to Pankaj Jain, FCBE 425,
University of Memphis, Memphis, TN 38111, Phone (901) 678 3810, Fax (901) 678 0839, Email:
pjain@memphis.edu or J.Wongchoti@massey.ac.nz. We are grateful to Michael Pagano, Ian Cooper, Henk
Berkman, John G Powell, Geoff Jones, Ben Jacobsen, and seminar participants at the European Finance Association
Annual Meeting 2008 (Athens, Greece), University of Mississippi, Southern Methodist University, and Old
Dominion University for comments and suggestions. All errors are our responsibility.
2
The Speed of Learning about Firms Profitability and their Price Multiples: A
Global Perspective


Abstract

This paper is an application of learning models in valuation of stocks listed on 52
international stock exchanges. We present direct evidence of declining analyst forecast errors
and return volatility with advancement in a firms age in the context of a learning model.
Consistent with a relatively new theory of learning and unlike the traditional focus of asset
pricing models on the discount rate in denominator, we find support for the notion that this
reduction in uncertainty about a firms prospects affects the expected value of cash flows in the
numerator of the valuation equation. This results in an inverse and convex relation between a
firms age and its market-to-book ratio. The valuation effects of learning are pervasive over time
and across countries, and are stronger for firms that do not pay dividends. We also find that the
speed of learning about firms profitability and its impact on valuation varies in economies with
diverse market designs and legal frameworks. Forecast errors are lower with strict enforcement
of laws prohibiting insider trading, higher feasibility of short selling, and dominance of local
versus foreign investors. These features also increase the learning speed and fuel quicker
achievement of long run equilibrium valuations.
3
Capital markets play an important role in the economic development of any country. Well
functioning markets ensure that both corporations and investors pay or receive fair prices for
their securities. This equilibrium assures that valuable projects are financed and negative present
value projects are rejected. In this framework, valuation of equity securities involves discounting
the profits (dividends, earnings, or cash flows) the stock brings to the stockholder in the
foreseeable future, and a final value upon disposition.
Much of the financial research, including the seminal CAPM and Fama-French (1995) 3-
factor model, is focused on the discount rate and its equity risk premium component. Formulas
for arriving at the profitability of a firm are in place as well. The calculations, however, depend
heavily on accurate forecasts of the firms revenues and expenses. Forecasting the future demand
for a firms products and its future competitive position accurately is indeed a big challenge. Bulk
of the finance literature implicitly assumes that since the negative errors in forecasting may be
offset by an equal amount of positive errors, such errors may be inconsequential in valuing
stocks at the portfolio level.
Only recently, Pastor and Veronesi (2003) suggest that the uncertainty about future
profitability and forecasting errors, even if symmetric around zero, affect asset prices and
valuations because of convexity in asset pricing formula. The gains from a positive surprise in
firms earnings growth asymmetrically outweigh the losses from a negative surprise of the same
magnitude. They predict that the ratio of market value to book value (M/B) declines with firms
age by assuming that investors learn about its expected future profitability with the
advancements in a firms age.
The goal of this study is to enhance our understanding of the learning process and its
valuation implications along several dimensions. First, we establish the validity of the existence
4
of a learning process and declining uncertainties by directly testing for any changes in analyst
forecast errors with advancements in a firms age. This is an important link in the learning theory
not yet tested explicitly. Second, we present pervasive international evidence of the valuation
implications of the learning theory from firms listed in 52 stock exchanges around the world. Our
third contribution deals with a subtle extension of the concept of speed of learning beyond firm
specific characteristics. We do confirm the differences in the learning process for dividend
paying and non-dividend paying firms, in international samples. We then extend that logic to
demonstrate differences in the learning process and its valuation implications in economies with
diverse market designs and legal frameworks. In our panel data analysis, the effects of market
restructuring are particularly interesting to analyze. There have been some significant changes in
the financial environment in recent years. Examples include stricter enforcement of laws
prohibiting insider trading laws, ever changing restrictions on short-selling constraints, and
increased involvement of sophisticated foreign institutional traders in global markets. Important
empirical questions arise as a result. Does a systematic pattern of learning exist in all markets?
Does the speed of learning change with significant variations in financial market regulations and
foreign investor participation? We develop these hypothesis and provide a related literature
review in section I of the paper.
We then address these issues empirically in a cross-country setting by analyzing a
universe of 22,858 international firms and its various subsets based on data availability in
Datastream international and I/BE/S international. Data sources are sample characteristics are
shown in section II. In that section, we also present the results of our data analysis. Both analyst
forecast errors and return volatility decline with advancement of firms age. This is a direct
evidence of a learning curve for analysts and stock market investors in the global markets.
5
Consistent with the asset pricing model based on learning, M/B ratio declines with the resolution
of uncertainty with advancement in firms age. The valuation effects of learning are pervasive
over time and across countries, and are stronger for firms that do not pay dividends. We also find
that the speed of learning about firms profitability and its impact on valuation varies in
economies with diverse market designs and legal frameworks. Forecast errors are lower with
strict enforcement of laws prohibiting insider trading, higher feasibility of short selling, and
dominance of local versus foreign investors. These features also increase the learning speed and
fuel quicker achievement of long run equilibrium valuations. However, some features such as
short selling introduce additional noise in emerging markets that outweigh the benefits of
speedier learning about negative news.
We summarize our findings and discuss some potentially fruitful directions for further
research in section III.

I. Testable Hypotheses
H1
0
: The Learning Process: There is a reduction in uncertainty about the profitability of a
firm with advancement in its age:

oo
2
ot
< u (1)
where
2
represents the uncertainty about profitability. New firms tend to possess high degree of
uncertainty about their product demand, revenue stream, operational cost, cash flow and
profitability. These uncertainties can manifest themselves in higher analyst forecast errors in the
early year of the firms existence. With the passage of time, such uncertainties resolve as the firm
goes through the concrete implementation of its business plans. The analysts can also forecast
the firms profitability more accurately with the advancement in firms age with more data
6
availability on actual historic performance of the firms and its financial results. Markov and
Tamayo (2006) and Linnainmaa and Torous (2009) develop models to explain predictability of
analyst forecast errors based on a learning process, although their focus is on separating learning
from irrationality at the analyst level. We conduct original and direct cross-country tests of
aggregate learning by investigating the relation between median analyst forecast error from
I/B/E/S international and firm age.

Valuation Model that includes the Numerator Effect of Uncertainty: The learning curve
in the financial markets around the world affects firms valuations if the effects of uncertainty
are explicitly modeled. Pastor and Veronesi (2003) predict higher M/B ratios for younger firms
due to greater uncertainty about their future profitability. The genesis of this relationship is the
convexity in the following valuation equation:
] ) 2 / exp[( ]} ) {exp[(
2
T r g T r g E
B
M
+ = = (2)
where M/B stands for market to book ratio, E{.} is the expectations operator, g is the growth rate,
r is the stochastic discount factor, T can be interpreted as the time after which firm is not
expected to grow at an abnormal rate, exp stands for exponential, It is a mathematical property of
this equation that M/B increases in
2
because of the convex relationship between growth rate
and valuation resulting from the convexity of compounding. Innovation is good and innovative
firms are valued highly even when their profitability is highly uncertain. The absolute wealth
increases associated with growth rates one unit about average dominate the absolute wealth
decrease associated with growth rates one unit below average. With learning, such uncertainties
reduce over time.
7
H2
0
: Valuation Implication of the Learning Curve: Thus, the theoretical prediction about the
effect of learning on valuations is that, ceteris paribus, M/B declines with the advancement in a
firms age:
oHB
oo
2
< u =
oHB
ot
< u (S)
Previous literature has confirmed this relationship for U.S. stocks. We present
comprehensive tests of this hypothesis in a global setting.
Speed of Learning: We formulate the concept of speed of learning for a given change in
the learning environment (E) as the change in the rate of reduction of uncertainty in analyst in
each year of a firms life as follows:

o
2
o
2
otoE
(4)
We examine three specific learning environment variables. The first variable relates to
the laws prohibiting insider trading. Stricter enforcement of such laws could either slow the
learning process or speed it up depending on the trade-off between internal and external sources
of information. On the one hand such laws eliminate arguably the most informed participants
(insiders) from affecting the learning grounds. This effect can slow the learning process. On the
other hand, the persistence of insider trading poses puts everyone else at a relative disadvantage;
a disincentive for equity research analysts and expert investors that could drive them away from
spending efforts towards learning about firms profitability. Empirical analysis is necessary to
determine which of these two effects dominate. We divide the firms years into those before and
those after the first enforcement of insider trading law in each country. The cut-off year for each
country is taken from Bhattacharya and Daouk (2002) and is reproduced in Appendix 1.
8
The second aspect of the learning environment is the feasibility of short-selling in a
market. The ability to short-sell is an important tool for arbitrageurs or analysts to exploit both
positive and negative news about a firm. Without this tool, there are limited incentives to search
for negative information about stocks that one does not own. As a result, we conjecture that the
feasibility of short-selling helps sharpen up the learning process. We divide the sample into
markets where short selling is feasible versus those where it is infeasible. This information is
obtained from Charoenrook and Daouk (2005). They study the impact of short selling constraints
on the cost of equity (the discounting rate in asset pricing models, which is a denominator effect)
whereas our focus on reduction in uncertainty of the cash flows through learning (a numerator
effect). Short selling facility is likely to enhance the learning process by rewarding both positive
and negative findings about the prospects of a stock.
The third aspect of learning environment that we analyze is the intensity of involvement
of foreign institutional traders in a countrys stock markets. Foreign investors can speed up
learning process because they can bring more sophisticated research skills into the country.
However, the involvement of foreign institutions is also associated with factors that can
introduce a lot of noise in the valuation process and slow down learning. Such factors include
capital flight, language barriers, and deviation of systemic or idiosyncratic foreign factors from
domestic factors. Empirical investigation can help us understand whether foreign institutions add
more speed or more noise to the learning process. Of the 52 countries in our sample, only 40
countries have foreign institutional trading data available in the Plexus database.
1
Thus, a
reduced sample is analyzed for this set of regressions. We divide the total dollar volume of all
trades undertaken by foreign institutions in a country by the total market capitalization of that

1
The details of Plexus dataset are described in Chiyachantana et al. (2004).
9
countrys stock market. Based on the median of this measure we divide the sample into countries
with high versus low foreign institution involvement.
These arguments lead us to the following hypothesis which we test by comparing the rate
of decrease in analyst forecast errors over time, across markets which possess stricter versus
weaker learning environment.
H3
0
: Learning Environment: Various aspects of the learning environment affect the speed
learning by the investors.
We test this hypothesis separately for each aspect of the learning environment. For
example, the tests for the effect of short selling compares the rate of decrease in analyst errors
over time in markets with feasible short selling with the decrease in markets with restricted short
selling.
Following Corollary 4 about dividend paying versus non-dividend paying firms in Pastor
and Veronesi (2003), we generalize the valuation implications of speed of learning for other firm
characteristics and market design. The valuation effects of a change in the speed of learning
resulting from a given change in the learning environment (E) is measured as the change in the
slope of M/B ratio in each year of a firms life as follows:
o
2
HB
otoE
(S)
We test the valuation implications of differential learning environments by separately estimating
the coefficients of the learning model for the three aspects of stricter versus weaker enforcement
of insider trading regulation, short selling feasibility, and involvement of foreign institutional
investors.

II. Data and Empirical results
10
Our main data sources are I/B/E/S International and Datastream International. We obtain
data item forecast period (FPEDATS), stock ticker symbol (TICKER) mean analyst forecasted
EPS (MEANEST), number of analysts or forecasters (NUMEST) for the stock for the given
period, and actual EPS (data ACTUAL) for each firm from I/B/E/S summary file for 12,453 US
firms and 21,271 international firms for each available year and then focus on the period from
1981 to 2004. We obtain market to book ratio (data item mnemonic MTBV), dividend per share
(DPS), total assets (DWTA), return on equity (DWRE), long term debt (account item 321), stock
return index (RI), and stock price (P) for 22,858 international firms from Datastream
International. We verify the accuracy of this historical data by comparing it with Compustat
Global datasets and Yahoo Finance for one company in each country. The next important item
we need is the age of each firm. Direct information on this variable is not available in any
traditional dataset. Therefore, we follow Fama and French (2001) and Pastor and Veronesi
(2003) and use the year of first appearance of any variable for a firm in the dataset as its year of
birth.
2

A. Evidence of learning process in a univariate setting
Table 1 provides preliminarily evidence consistent with Hypothesis 1 along two dimensions.
First, we investigate whether there is a long-run declining trend of analyst forecast errors over
time. Analyst forecast errors is computed as the absolute difference between mean year-end
forecast and actual year-end EPS, divided by the absolute actual EPS. Panel A shows that
median analyst forecast error is 20.69% for 1 year old US firms and 11.42% for 20 year old US

2
In Datastream, annual price tends to be the variable that becomes available first. As a result, the definition of age in
our study is based primarily on the first year the annual price is available. This information is used to allocate the
firm to an age category in our panel dataset. We start this process from the year 1969 which is the first year of
availability of price data in Datastream for UK firms. Our sample ends in the year 2004 implying that the maximum
age that any firm can attain in our sample is 36 years. Book value data becomes available in Datastream only from
the year 1981, which practically becomes the beginning date for all of our empirical analyses based on M/B ratio.
11
firms.
3
The difference of 9.27% between the two median errors is statistically significant at 1%
level and can be interpreted as the cumulative amount of learning. This finding verifies an
important but untested assumption implicit in the Pastor and Veronesi (2003) learning model that
investor learn about firms profitability with advancement in its age. In Panel B, we establish that
the learning process is omnipresent in the worldwide sample of firms. The cumulative magnitude
of learning is 9.08% in the international sample is very similar to the US sample although in
international firms in any given age group have larger errors than the US firms.
[Insert Table 1 about here]
Another dimension of uncertainty about the firms profitability is its return volatility. We
compute return volatility as the standard deviation of monthly returns of each stock in each year
of observation. Panel C of Table 1 shows that return volatility declines with advancement is a
firms age. Median return volatility is 11.89% for 1 year old firms and 7.75% for 20 year old
firms. The difference between the two groups is 4.13%, which is statistically significant at the
1% level.

B. Country-wise analysis of the impact of the learning process on firms price multiples
The value implication of the learning process is declining M/B ratio with advancement in
a firms age, as stated in our second hypothesis, Table presents the median M/B ratio in 52
countries for firms in ages ranging from one to 10 ten years. Ratios for US firms, shown in bold
font, are reproduced from the Pastor and Veronesi (2003) article. Our international evidence is
consistent with the patterns found in their study and serve to establish the pervasive global

3
The forecast errors are low in the IPO year of the firms, jump up in year 2 and then decline monotonically giving
the error curve a hump-shape. Reasons for low errors in the IPO year could include the fact the costs in the project
build-up stage (when there are usually no revenues) could be easier to forecast than the combination of revenues and
costs in the subsequent years. The legal consequence of erroneous predictions in the IPO prospectus are also more
severe than the analyst forecast errors in subsequent errors.
12
application of valuation implications of the learning model. For the overall sample, median M/B
of 1 year old firms is 1.99 compared to M/B of 1.27 for 10 year old firms. The difference of 0.72
between the two groups reported in the second last column is statistically significant at the 1%
level. We present country-wise data for each of the 52 countries. The countries are grouped into
developed and emerging markets based on the classification obtained from Morgan Stanley
Capital Internationals website at mscidata.com. The direction of the change in M/B is consistent
with the learning model in 46 out of the 52 countries or 88% of our sample and the difference is
statistically significant in 43 countries or 83% of the sample countries. The countries with some
of the biggest learning effects include Netherlands, Japan, and France among the developed
markets and Egypt, Thailand, and Morocco among the emerging markets. We corroborate these
country-wise findings on the valuation implications of the learning process in multivariate
settings in the following sections.
[Insert Table 2 about here]
C. Multivariate analysis of the valuation implications of the learning model
Next we perform a international panel data regressions to confirm the significance of the
inverse relationship between M/B and firms age controlling for other factors that are known to
affect M/B
4
.:
log(M/B)
i,t
= a + b.AGE
i,t
+ c.DD
i,t
+ d.LEV
i,t
+ e.SIZE
i,t
+ f.ROE
i,t
+ g.ROE(1)
i,t

+ h.ROE(2)
i,t
+ i.ROE(3)
i,t
+ j.RET(1)
i,t
+ k.RET(2)
i,t
+ l.RET(3)
i,t
+ m.RET(3)
i,t
+
i,t
(6)
where i = 1- N, N is the # of firms in each year t. AGE is defined as - 1/ (1+ Firms Age) as this
specification captures the convexity in the relationship between M/B and firm age in accordance
with Pastor and Veronesis (2003) learning model. DD is the dividend dummy with value 1 for

4
For all regression analyses, we winsorize observations with any variable at the 1
st
and 99
th
percentile, to arrive at
the final sample. Firms which were born in the year 2002 onwards are also excluded as we need three years of data
for future ROE and annual stock returns.
13
dividend paying firm and 0 otherwise. LEV is the debt ratio. SIZE is the natural log of the firms
total asset. Pastor and Veronesi (2003) utilize the Bayesian updating technique in their learning
model to predict the relationship between expected profitability (positive) and expected future
stock returns (negative) and Market-to-book ratio. In our regression, ROE is the return on equity
and regressed up to three years following year t. RET is future annual stock return up to three
years from current period. The standard errors are clustered by firm to take into account residual
dependence created by firm effect, as suggested by Petersen (2009).
5
The results are provided in
Table 3.
[Insert Table 3 about here]
The global prevalence of inverse relationship between M/B ratio and the firms age
implied by the learning model is confirmed in the regression framework where the coefficient on
age is -0.81 with a t-statistics of -17.22, which makes it highly significant at the 1% level. The
magnitude of the coefficient compares well with the benchmark for NYSE stocks during 1962 to
2000 analyzed by Pastor and Veronesi (2003). They report the AGE coefficient of -0.71 which
translates into a economically significant 12.5 percent difference in valuation between the one
and two years old firm. The coefficients on control variables are in the expected direction. There
is a positive relation between future growth in profitability and the M/B ratio implying that
investors pay a higher price for firms with higher growth prospects (g). Future stock returns are
negatively correlated with current M/B ratio implying that investors are willing to accept a lower
equity premium (r) by paying a higher stock price today for the high M/B stocks. It is important

5
In line with Pastor and Veronesi (2003), we also perform Fama and Macbeth(1973) regression to deal with
potential time effect in our study and arrive at the same conclusion as clustered standard errors method reported in
the Tables. The Fama and Macbeth(1973) results are not presented for brevity but are available upon request.

14
to note that the effect of uncertainty of profitability (
2
), measured through firm age, survives in
these regressions after controlling for these other important determinants of M/B ratio.
We also divide our sample into developed and emerging markets. The coefficient on age
is more negative in the emerging markets. One interpretation of this finding is that the lower
quality of disclosures in emerging markets increases the uncertainties about the cash flows of the
new companies. Therefore, investors have to learn more from the companys actual cash flows
than from the financial projections. The other interesting insight includes a stronger preference
for dividend payments in emerging markets. M/B ratio is 0.14 times higher for dividend paying
firms in emerging market relative to non-dividend paying firms. On the contrary, M/B ratio is
lower by 0.16 times for dividend paying firms in developed market relative to non-dividend
paying firms in those markets. Results in all panels of table 3 are consistent with our second
hypothesis.
D. Dividend vs Non-dividend paying firms
Dividend payments have two opposite effects on the M/B ratio in the context of learning.
The positive effect of dividend payments is a quicker reduction in the uncertainty about the cash
flows that investors receive from younger firms. A bird in hand is better than two in the bush.
The company can lose undistributed profits in future but it cannot reclaim distributed dividends
because of the limited liability feature. Moreover, managers tend to smooth dividend payments
over time. Thus, dividend policy can release information to the outside investors about
managements expectations of future profitability. These uncertainty dampening effects of
dividend payment would increase the correlation due to a higher speed of learning. However, the
opposite effect in the context of learning is that dividend payments reduce the firms growth rate
(Pastor and Veronesi (2003)) and thus convexity. Reduced uncertainty also lowers convexity and
15
correlations of dividend paying firms. The net result of these two effects is an empirical issue
which we examine in Table 4.
[Insert Table 4 about here]
An extended version of regression equation (6) is used to capture the incremental effect
of dividend payments on the learning process. We now have an interaction term between AGE
and dividend dummy, in addition to the other variables discussed previously. Overall, dividend
payment has an important role in determining the strength of the relationship between M/B and
the firms age. In developed markets, dividend payments weaken the convexity of the M/B to
age relationship, consistent with Pastor and Versoni (2003) prediction of lower growth rate of
dividend paying firms. The coefficient on the interaction term of age times dividend dummy is
positive 0.56 and statistically significant in Panel A for the entire sample and 0.60 and
statistically significant in Panel B for the developed markets. However, in emerging markets
dividend payments do not significantly affect the learning phenomenon. The interaction term has
an insignificant coefficient of 0.079 with a t-statistics of 0.43. It is possible that uncertainty
reduction effects of dividends in the emerging markets offset the growth dampening effect.
E. Analyst forecast errors and the learning environment
We now merge the firm-specific and country-specific information from the various data
sources i.e. I/B/E/S, Datastream International, and learning environment values for each country
for each year. The purpose of this exercise is to understand the incremental effects of each
variable and also how a change in a given feature of the learning environment affects the
learning process and its valuation implications. Only those firm-year or country-year
observations which are present in all three data sources are included.
16
We test if the mean analyst error is related to a firms age. Table 5 presents several variations of
regression results all of which point to an inverse relationship between analyst errors and firms
age. Each observation represents a firm-year. Dependent variable is the analyst forecast error
throughout this table. Results in Panel A are based on all countries. The first row uses only firm
age as the explanatory variables; the second row adds control variables commonly used in
analyst forecast literature such as Thomas (2002); and the third row adds control variables from
the learning model. Results for sub-samples based on developed market are in Panel B, emerging
markets in Panel C, and just the U.S. in Panel D. The coefficient on age is negative and
statistically significant in each row. This finding is consistent with the learning curve stated in
the first hypothesis. The coefficients on the control variables are generally consistent with prior
literature and can be interpreted as follows. Firm size matters; the bigger the firm, the smaller are
the errors. Consistent with previous studies, analyst forecast errors decline with the number of
analysts, whereas they increase with leverage and return volatility. With all these control
variables included in the regression, the negative relationship between analyst forecast errors and
firm age is still significant at the 1% level. Our findings represent the first large scale worldwide
evidence of the existence of a learning curve for the equity analysts.
[Insert Table 5 about here]
Next, we turn our attention to three different features of the learning environment in each
country to analyze how they affect the learning process. These features are a history of actual
enforcement and convictions under laws prohibiting insider trading laws, feasibility of executing
short sales by investors who possess negative information but do not own the stock, and above
median involvement of sophisticated foreign institutional traders in a country. For each feature,
17
we define a learning environment indictor dummy variable (E) and assign it the value of 1 for the
country-years when that feature is present and 0 if it is absent.
There is a rich cross-sectional variation as well as time-series variation in the learning
environment features across countries. At the beginning of our sample in 1981, the proportion of
firms from countries where prohibition against insider trading was enforced is 11% and this
proportion increases to 84% by 2004. The proportion of firms from countries where short selling
is feasible changes from 96% in 1981 to 72% in 2004. Although this statistic might seem odd,
but it is a manifestation of the typical regulatory response to major market crashes. Thus, not
many countries thought about restricting short sales until 1987, when a host of restrictions were
considered by the regulators. Many restrictions are removed after a significant amount of time
elapses after a major crash. Thus, short selling feasibility has a tremendous amount of cross
sectional and time series variation in our sample. Finally, the proportion of firms-years where
foreign institutional holding is above median is constant at 50% for each year by definition.
We estimate the analyst forecast error regressions similar to Table 5 again but after
adding the interactive learning environment * age variables among the explanatory variables and
report the results in Table 6. Separate regressions are estimated to assess the effect of each
learning environment variable. Negative coefficient should be interpreted as faster speed of
learning.
[Insert Table 6 about here]
Enforcement of insider trading law speeds up the rate of decline of analyst forecast errors
with advancement in a firms age. Thus, the incentives for outside analysts to generate profitable
information outweigh any information losses from eliminating corporate insiders from the price
discovery process. Regulators should, therefore, enact insider trading prohibitions and
18
enthusiastically prosecute insider trading cases. Feasibility of executing short sell transactions is
another market environment feature that speeds up the rate of decline of analyst forecast errors
with advancement in a firms age. This finding is consistent with our hypothesis that short selling
creates bigger incentives for learning about both positive and negative information about a firms
profitability. In contrast, the involvement of foreign institutional investors appears to generates
higher errors for older firms, which is inconsistent with the notion of a learning curve. Thus, it
appears that the noise introduced by factors such as capital flight, language barriers, or deviation
of systemic or idiosyncratic foreign factors from domestic factors outweigh the sophistication
and skill that foreign investors might bring to a stock research in a given country.
F. Valuation implications of the learning environment and the speed of learning
Finally, we estimate an incremental effect regression model similar to one proposed by He and
Ng (1998) to investigate the incremental effect of learning environments on learning speed,
which is captured by the negative and convex relationship between the rate of change in M/B
ratio (i.e., log(M/B)
t
- log(M/B)
t-1
) and the firms age :

Rate of Change of Valuation = c
d0
E + c
d1
E AGE
i
+ c
d2
E DIV
i
+ c
d3
E.LEV
i
+
c
d4
E.SIZE
i
+ c
d5
E ROE
i
+ c
d6
E ROE(1)
i
+ c
d7
E ROE(2)
i
+ c
d8
E ROE(3)
i
+ c
d9
E
RET(1)
i
+ c
d10
E RET(2)
i
+ c
d11
E RET(3)
i
+ c
0
+ c
1
AGE
i
+ c
2
DD
i
+ c
3
LEV
i
+
c
4
SIZE
i
+ c
5
ROE
i
+ c
6
ROE(1)
i
+ c
7
ROE(2)
i
+ c
8
ROE(3)
i
+ c
9
RET(1)
i
+ c
10
RET(2)
i
+
c
11
D RET(3)
i
+
i

where (i = 1- N, N is the # of firms). AGE is defined as - 1/ (1+ Firms Age), which captures the
convex relationship between M/B and firm age in the Pastor and Veronesi (2003) learning
model. DIV is the dividend dummy with value 1 for dividend paying firm and 0 otherwise. LEV
is the debt ratio. SIZE is the natural log of the firms totol asset. ROE is the return on equity and
regressed up to three years following year t. RET is future annual stock return up to three years
from current period. E represents learning environment dummy variable. E equals 1 for better
19
learning environment and 0 otherwise as described in the previous section. All variables of firms
in each country are measured in its own currency. There are 9,640 firms (68,034 firm-year
observations) with valid data for the whole sample, and 6,631 and 3,009 representing developed
and emerging markets respectively. All t-statistics reported in parentheses are based on clustered
standard errors as suggested by Petersen (2009). For brevity, we report only three regression
coefficients, AGE, E, and AGE*E. Panel A is based on full dataset whereas Panel B and Panel C
are based on developed market and emerging market sub-samples, respectively. Three separate
regressions are reported in each panel, one for each learning environment.
[Insert Table 7 about here]
The negative coefficient on AGE variable in every panel establishes the inverse and
convex relation between M/B and firm age. The second column is simply the direct effect of a
particular type of regulation on valuation. Note that the coefficients in the second column only
capture the level of valuations and are not related to the learning model because the learning
model requires an interaction with firm age. From the overall sample used in Panel A, we
observe that all three features of the learning environment have positive coefficient. Thus, we
conclude enforcement of insider trading laws, feasibility of short selling transaction, increased
presence of foreign institutional investors, are all associated with higher stock valuations. Thus
in the valuation sense, these features are good. However, to assess the impact of these features on
the speed of learning and change in M/B, we interact firm age with learning environment
dummy. The coefficients are in the third column. Negative coefficients represent faster speed
according to the learning model. Negative coefficient suggests that enforcement of insider
trading speeds up the learning process whereas positive coefficients for short selling and foreign
investors suggest that those features actually slow the learning process. In Panel B for developed
20
markets and Panel C for emerging markets, we see that the results are consistent with overall
results for speedier learning with enforcement of insider trading and slower learning with above
median foreign institutional investors. However, the short selling activities have opposite effects
in developed versus emerging markets. Short selling appears to speed up the learning process
only in developed markets. In emerging markets short selling is slowing the learning process
through additional noise. The overall conclusion from the table is consistent with our third
hypothesis which states that various features of learning environment matter as determinants of
the speed of learning.

G. Robustness tests
We conduct several robustness checks to verify that our findings can be generalized.
Tables are not included in the manuscript for brevity but will be available from authors or data
section of the journal website, if this facility is provided. Earlier in Tables 1 and 2, we showed
that the decline in analyst forecast errors and M/B ratio with the advancement of firms age is
pervasive across markets and countries. We also conduct year-by-year analysis and find that the
in any given year, the analyst forecast errors and M/B ratio are lower for older firms than those
for younger firms.



III. Conclusion
This paper provides pervasive global evidence consistent with an intriguing valuation
theory that takes into account a learning curve for stock market analysts and investors. The
21
valuation model proposed by Pastor and Veronesi (2003) assumes that investors face significant
uncertainty about profitability and cash flows of young firms. Unlike the traditional focus of
asset pricing models on the denominator or discount rates, they focus on how the uncertainty
affects the expected value of cash flows in the numerator. The convex nature of valuation
equation implies that the uncertainty actually increases the M/B. However, as time passes,
investors learn about the true potential of firms profitability and resolve the uncertainty. Thus,
the model predicts that M/B is higher for younger firms than for older firms.
In this paper, we provide a comprehensive empirical analysis of this issue in a global
setting. By directly showing that analyst forecast errors decline with advancements in a firms
age, we provide an important link in the learning theory not yet tested globally in the empirical
literature. Return volatility of stocks in global, developed, and emerging markets also decreases
with a firms age. Next, we present pervasive international evidence of the valuation implications
of the learning theory from firms listed in 52 stock exchanges around the world. Over eighty
percent of the countries have statistically significant valuation changes consistent with the
learning theory. This inverse and convex relationship between M/B and firm age is statistically
significant in the regression framework after controlling for other factors known to determine the
market-to-book ratio such as future growth potential and expected equity premium. The inverse
relationship between M/B and firms age is also more striking for non-dividend paying firms.
We extend the concept of speed of learning beyond firm specific characteristics to
understand the impact of diverse market designs and legal frameworks on the learning process.
The three key learning environment features included in our analysis are stricter enforcement of
laws prohibiting insider trading laws, ever changing restrictions on short-selling constraints, and
increased involvement of sophisticated foreign institutional traders in global markets.
22
Enforcement of insider trading law speeds up the rate of decline of analyst forecast errors with
advancement in a firms age, and firms are valued at their long run equilibrium values more
quickly. Thus, the incentives for outside analysts to generate profitable information outweigh any
information losses from eliminating corporate insiders from the price discovery process.
Regulators should, therefore, enact insider trading prohibitions and enthusiastically prosecute
insider trading cases. Feasibility of executing short sell transactions is another market
environment feature that speeds up the rate of decline of analyst forecast errors with
advancement in a firms age. This finding is consistent with our hypothesis that short selling
creates bigger incentives for learning about both positive and negative information about a firms
profitability. However, the short selling activities have opposite valuation effects in developed
versus emerging markets suggesting that this feature might be introduce more noise in emerging
markets outweighing the uncertainty resolution effects. Finally, the involvement of foreign
institutional investors appears to generate higher errors for older firms, which is inconsistent with
the notion of a learning curve. Thus, it appears that the noise introduced by factors such as
capital flight, language barriers, or deviation of systemic or idiosyncratic foreign factors from
domestic factors outweigh the sophistication and skill that foreign investors might bring to a
stock research in a given country. When domestic investors dominate, learning speed is faster
and M/B valuation ratio approaches long term equilibrium faster.

rmFuture research can explore additional determinants of the speed of learning and also
develop more advanced theoretical constructs for this concept. The results in this paper implore
that asset pricing models include the learning curve as an important factor. The learning process
23
about firms profitability has important implications for stock valuation in countries around the
world.

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TABLE 1. The Learning process: Declining uncertainty with advancement in firms age
We obtain mean analyst forecasted EPS and actual EPS for each firm from I/B/E/S international dataset from 1981 to 2004. Analyst
forecast errors is computed as the absolute difference between mean forecast and actual EPS, divided by the absolute actual EPS.
Data are winsorized at 1
st
percentile and 99
th
percentile to eliminate potential outliers and input errors. The first appearance of a firm
in the database is used as a proxy for the firms year of birth for the purposes of calculating its age. Each year, firms of the same age
are grouped together. Panel A used only 12,453 US firms and shows the median analyst forecast errors for firms within each age
group. Panel B repeats the analysis including 21,271 international firms. We obtain total monthly return for each firm from
Datastream International. Return volatility is computed as the standard deviation of monthly returns of each stock in each year of
observation. Panel C presents the median return volatility for firms within each age group. Total learning is the difference between
year 1 and year 20. Asterisks indicate statistical significance at 1% level with ***.

Panel A. Declining Analyst Forecast Errors for US Firms
Firm Age in Years 1 2 3 4 5 6 7 8 9 10
Forecast Error 20.69% 29.27% 31.56% 31.79% 30.77% 27.45% 23.99% 25.00% 21.24% 20.05%

Firm Age in Years 11 12 13 14 15 16 17 18 19 20
Forecast Error 19.40% 19.12% 18.58% 17.32% 15.75% 16.34% 15.69% 13.63% 13.82% 11.42%

Total Learning 9.27%***

Panel B: Global Evidence on Declining Analyst Forecast Errors
Firm Age in Years 1 2 3 4 5 6 7 8 9 10
Forecast Error 23.08% 31.92% 33.33% 33.56% 34.49% 32.26% 30.83% 30.79% 26.65% 25.57%

Firm Age in Years 11 12 13 14 15 16 17 18 19 20
Forecast Error 23.19% 23.57% 24.64% 24.14% 22.05% 24.73% 23.19% 18.88% 17.43% 14.00%

Total Learning 9.08%***

Panel C: Declining Return Volatility for Firms around the World
Firm Age in Years 1 2 3 4 5 6 7 8 9 10
Return Volatility 11.89% 11.32% 11.28% 11.19% 10.75% 10.64% 10.29% 9.95% 10.29% 9.99%

Firm Age in Years 11 12 13 14 15 16 17 18 19 20
Return Volatility 10.02% 9.89% 9.17% 9.74% 9.38% 8.59% 8.38% 9.03% 8.65% 7.75%

Total Reduction

4.13%***
TABLE 2. Country-wise analysis of the impact of the learning process on firms price multiples
This table presents the median market to book ratio (Datastream mnemonic MTBV) in 52 countries for firms in ages ranging from
one to 10 ten years. The last column shows the number of firms for which Datastream has MTBV. Data are winsorized at 1
st
and 99
th

percentiles of MTBV to remove potential outliers and data entry errors. Sample period ranges from 1981 to 2004. The first
appearance of a firm is used as a proxy for the firms years of birth for the purposes of calculating its age. Ratios for US firms,
shown in bold font, are reproduced from the Pastor and Veronesi (2003) article. Cumulative effect of learning on valuation is defined
as the difference between year 1 M/B and year 10 M/B. We indicate statistical significance of the difference at 1%, 5%, and 10%
levels with ***, **, *, respectively.



Age 1 2 3 4 5 6 7 8 9 10
Cumulative
effect of
learning on
valuation
Number
of Firms

All firms 1.99 1.79 1.62 1.55 1.43 1.43 1.41 1.37 1.30 1.27

0.72***

22,858

Panel A: Developed markets

Australia 1.68 1.55 1.38 1.40 1.20 1.48 1.43 1.56 1.36 1.33
0.35***
1,502
Austria 1.49 1.31 1.12 1.23 1.30 1.27 0.98 1.03 0.98 0.97
0.52***
144
Belgium 1.62 1.30 1.18 1.24 1.15 1.18 1.05 1.18 0.97 1.03
0.59***
178
Canada 1.54 1.56 1.49 1.55 1.50 1.50 1.61 1.71 1.60 1.56
-0.02
1,431
Denmark 1.22 1.28 1.07 1.13 0.99 1.14 1.08 1.01 0.96 0.99
0.23***
241
Finland 1.50 1.23 1.22 1.31 1.35 1.33 1.3 1.22 1.22 1.39
0.11***
191
France 2.29 1.90 1.60 1.40 1.40 1.30 1.19 1.09 1.16 1.23
1.06***
1,038
Germany 2.37 1.95 1.55 1.32 1.33 1.69 1.90 2.10 2.11 1.86
0.51***
992
Hong Kong 1.71 1.40 1.20 1.08 0.90 0.87 0.87 0.75 0.81 0.81
0.90***
1,060
Ireland 1.81 1.71 1.55 1.61 1.59 1.64 1.58 1.87 1.79 1.88
-0.07*
51
Italy 1.60 1.51 1.40 1.39 1.15 1.05 0.94 0.99 1.00 0.91
0.69***
415
Japan 2.42 2.27 1.98 1.79 1.53 1.48 1.54 1.40 1.37 1.17
1.25***
2,552
Luxemboug 0.87 1.40 1.26 1.19 1.44 1.88 1.81 1.34 1.05 0.90
-0.03
28
Netherlands 2.63 2.46 2.01 1.795 1.74 1.53 1.77 1.73 1.28 1.12
1.51***
239
TABLE 2. ..Continued.
Age
1 2 3 4 5 6 7 8 9 10
Cumulati
ve effect
Number
of Firms


New Zealand 1.36 1.22 1.07 1.02 1.02 1.03 1.04 1.31 1.35 1.30
0.06

34
Norway 1.50 1.30 1.30 1.26 1.32 1.31 1.28 1.29 1.38 1.25
0.25***
387
Portugal 1.84 1.76 1.63 1.51 1.35 1.30 1.28 1.00 1.09 1.20
0.64***
127
Singapore 2.02 2.01 1.72 1.80 1.71 1.36 1.52 1.42 1.44 1.30
0.72***
591
Spain 1.83 1.66 1.55 1.30 1.37 1.30 1.43 1.41 1.48 1.66
0.17***
155
Sweden 2.07 1.99 1.90 1.70 1.45 1.55 1.59 1.55 1.49 1.61 0.46*** 535
Switzerland 1.50 1.31 1.17 1.19 1.11 1.07 1.16 1.11 1.11 1.04 0.46*** 476
UK 2.61 2.22 1.97 1.83 1.79 1.75 1.70 1.68 1.66 1.76 0.85*** 2,764
USA 2.25 1.80 1.57 1.49 1.39 1.38 1.35 1.33 1.27 1.25 1.00*** See PV(2003)

Panel B: Emerging markets


Argentina 1.22 1.00 1.04 1.34 1.19 0.84 0.78 0.58 0.4 0.65 0.57***

69
Brazil 0.83 1.28 0.82 0.75 0.92 0.97 0.95 0.93 0.66 0.585 0.25*** 510
Chile 1.18 1.12 1.63 1.43 1.28 1.44 1.33 1.08 0.97 0.74 0.44*** 183
China 3.33 2.70 2.50 2.75 2.76 2.56 2.58 3.10 3.31 3.01 0.32*** 1,376
Colombia 1.09 0.72 0.74 0.65 0.43 0.53 0.56 0.51 0.48 0.545 0.55*** 35
Czech Rep. 0.77 1.20 1.01 0.66 0.74 0.5 0.45 0.54 0.82 0.42 0.35*** 30
Egypt 2.34 2.87 1.63 1.6 1.27 0.93 0.82 1.04 0.5 0.34 2.00*** 21
Ethiopia 2.5 1.47 2.1 2.78 2.85 2.5 1.47 2.1 2.14 2.99 -0.49*** 11
Greece 2.53 2.23 1.89 1.91 1.42 1.53 1.35 1.25 1.22 1.98 0.55*** 380
Hungary 1.49 1.06 1.20 1.10 0.96 0.9 0.94 0.94 0.78 0.74 0.75*** 36
India 1.84 1.85 2.01 2.16 2.12 2.23 1.54 1.34 1.04 0.89 0.95*** 342

TABLE 2. ..Continued.
Age
1 2 3 4 5 6 7 8 9 10
Cumulat
ive effect
Number
of Firms

Indonesia 1.69 1.28 1.18 1.25 0.93 0.88 0.83 0.79 0.75 1.15 0.54*** 320
Israel 1.94 1.84 2.31 1.86 1.51 1.16 1.54 1.92 1.61 1.83 0.11 98
Korea 1.45 1.26 1.06 0.87 0.83 0.91 0.78 0.69 0.61 0.66 0.79*** 772
Malaysia 1.47 1.44 1.42 1.50 1.28 1.17 1.12 1.29 1.41 1.40 0.07 897
Mexico 1.23 1.49 1.25 1.19 1.13 1.19 1.11 0.97 1.06 1.00 0.23*** 124
Morocco 2.98 2.07 2.40 2.01 2.03 2.31 2.10 1.74 1.62 1.48 1.50*** 14
Pakistan 1.81 2.61 1.96 1.18 0.93 1.00 0.78 0.83 1.01 0.92 0.89*** 76
Peru 1.31 1.08 1.18 1.10 1.06 0.95 0.84 0.81 0.75 0.77 0.54*** 82
Philippines 1.86 1.75 1.39 1.21 1.29 1.24 1.14 1.02 0.81 0.8 1.06*** 248
Poland 1.13 1.10 1.12 1.20 1.12 1.33 1.28 1.31 1.04 1.00 0.13*** 80
Russia 0.39 0.30 0.62 0.31 0.43 0.37 0.36 0.30 0.65 0.19 0.20*** 41
South Africa 2.31 2.22 1.61 1.19 1.25 1.32 1.25 1.44 1.03 1.16 1.15*** 368
Sri Lanka 1.65 2.16 0.98 1.16 1.49 0.94 1.89 1.72 1.07 1.03 0.62*** 27
Taiwan 2.46 2.31 1.96 1.67 1.61 1.67 1.59 1.46 1.43 1.30 1.16*** 594
Thailand 2.64 2.33 2.08 1.61 1.57 1.52 1.28 1.13 1.01 1.06 1.58*** 726
Turkey 1.35 1.91 1.34 1.58 1.25 1.43 1.37 1.29 1.40 1.85 -0.50*** 218
Venezuela 0.21 0.49 0.41 0.37 0.85 0.42 0.53 0.58 0.22 0.27 -0.06 36
Zimbabwe 1.27 1.24 0.83 1.01 0.62 0.485 0.51 0.285 0.31 0.38 0.89*** 13



Number (and percentage) of countries with year 1 M/B higher than year 10 M/B 46 (88%)
Number (and percentage) of countries with statistically significant M/B changes 43 (83%)

Table 3. Clustered standard errors regression analysis on M/B ratio and the firms age for global portfolio

The following panel regression is estimated on pooled dataset while using clustered standard errors as:

log(M/B)
i,t
= a + b.AGE
i,t
+ c.DD
i,t
+ d.LEV
i,t
+ e.SIZE
i,t
+ f.ROE
i,t
+ g.ROE(1)
i,t
+ h.ROE(2)
i,t
+ i.ROE(3)
i,t

+ j.RET(1)
i,t
+ k.RET(2)
i,t
+ l.RET(3)
i,t
+
i,t

where (i = 1- N, N is the # of firms). M/B
i,t
is the market to book ratio for firm i in period t. AGE is defined as - 1/ (1+ Firms
Age), which captures the convex relationship between M/B and firm age in the Pastor and Veronesi (2003) learning model. DD
is the dividend dummy with value 1 for dividend paying firm and 0 otherwise. LEV is the debt ratio. SIZE is the natural log of
the firms totol asset. ROE is the return on equity and regressed up to three years following year t. RET is future annual stock
return up to three years from current period.
i,t
is the error term, which we cluster in SAS using proc surveyreg. All variables of
firms in each country are measured in its own currency. These regressions are based on 10,656 international firms for which
historic data for all variables in the model are available in Datastream. All t-statistics are reported in parentheses.

Intercept AGE DD LEV SIZE ROE ROE(1) ROE(2) ROE(3) RET(1) RET(2) RET(3) Adj. R
2
Panel A: All firms
Coefficient 0.203 -0.813 -0.052 0.026 0.009 0.241 0.569 0.413 0.114 -0.373 -0.307 -0.258 0.14
T-statistics (5.02) (-17.22) (-3.07) (0.53) (3.70) (9.74) (19.73) (18.92) (6.86) (-45.04) (-38.96) (-37.17)
Panel B: Developed markets firms
Coefficient 0.177 -0.686 -0.145 0.072 0.018 0.258 0.538 0.400 0.113 -0.364 -0.274 -0.255 0.13
T-statistics (4.02) (-13.00) (-7.09) (1.34) (7.21) (8.66) (15.05) (15.07) (5.42) (-36.23) (-28.58) (-31.73)
Panel C: Emerging markets firms
Coefficient 0.569 -1.673 0.136 -0.129 -0.039 0.268 0.670 0.448 0.112 -0.413 -0.376 -0.251 0.21
T-statistics (5.58) (-16.61) (5.08) (-1.23) (-6.37) (7.07) (15.92) (12.34) (4.24) (-30.32) (-29.98) (-19.45)




Table 4. The effect of dividend payment on the learning process and price multiples

The following panel data regression is estimated on pooled dataset while using clustered standard errors as suggested by
Petersen (2009):

log(M/B)
i,t
= a + b.AGE
i,t
+ c.DD
i,t
+ e.DD.AGE
i,t
+ f.LEV
i,t
+ g.SIZE
i,t
+ h.ROE
i,t
+ i.ROE(1)
i,t
+ j.ROE(2)
i,t

+ k.ROE(3)
i,t
+ l.RET(1)
i,t
+ m.RET(2)
i,t
+ n.RET(3)
i,t
+
i,t

The term DD.AGE captures the incremental effect of dividend payment on the learning process. Rest of the variables retain their
definitions from the previous table. The dataset is identical to one used in the previous table.
Intercept AGE DD AGE.DD LEV SIZE ROE ROE(1) ROE(2) ROE(3) RET(1) RET(2) RET(3) Adj. R
2
Panel A: All Sample
Coeff. 0.134 -1.218 0.04 0.564 0.027 0.009 0.239 0.569 0.413 0.113 -0.373 -0.307 -0.257 0.14
T-stat (3.06) (-12.97) (1.50) (19.78) (0.55) (3.69) (9.73) (19.78) (18.97) (6.83) (-45.07) (-39.03) (-37.02)
Panel B: Developed market firms
Coeff. 0.103 -1.129 -0.05 0.60 0.072 0.018 0.257 0.539 0.401 0.113 -0.364 -0.274 -0.254 0.13
T-stat (2.13) (-10.10) (-1.59) (5.07) (1.33) (7.23) (8.69) (15.12) (15.14) (5.42) (-36.30) (-28.67) (-31.70)
Panel C: Emerging market firms
Coeff. 0.561 -1.722 0.15 0.079 -0.129 -0.039 0.267 0.67 0.448 0.112 -0.413 -0.376 -0.251 0.21
T-stat (5.23) (-11.13) (3.19) (0.43) (-1.23) (-6.37) (7.06) (15.93) (12.34) (4.24) (-30.24) (-29.96) (-19.59)






Table 5. The learning process and declining analyst forecast errors with advancement in firms age
The following OLS regression is estimated to capture the relationship between analyst forecast errors and firm age:

FE
i,t
= a + b.AGE
i,t
+ c.SIZE
i,t
+ d.LEV
i,t
+ e.RETVOL
i,t
+ f.NUMEST
i,t
+ g.DD
i,t
+ h.ROE
i,t
+ i.ROE(1)
i,t
+
j.ROE(2)
i,t
+ k.ROE(3)
i,t
+ l.RET(1)
i,t
+ m.RET(2)
i,t
+ n.RET(3)
i,t
+
i,t


where (i = 1- N, N is the # of firms). White-adjusted standard errors are used to calculate t-statistics reported in the parenthesis.
FE is analyst forecast error which is calculated as the (absolute) difference between median forecasted EPS and the actually
reported EPS scaled by the year-end stock price. AGE is defined as the natural log of age (first year of appearance in the
Datastream dataset). LEV is the debt ratio. SIZE is the natural log of the firms total asset. RETVOL is simple return volatility
of each stock as defined by the standard deviation of monthly returns during the observation year. NUMEST is the number of
analysts involved in predicting EPS for the relevant period (i.e., analyst coverage). There are 14,594 firm-year observations in
our Datastream-IBES merged sample.

Intercept AGE SIZE LEV RET
VOL
NUMEST DD ROE ROE(1) ROE(2) ROE(3) RET(1) RET(2) RET(3) Adj. R
2
Panel A: All Firms
Coeff
T-Stat
0.093
(19.70)
-0.018
(-8.57)
0.005
Coeff
T-Stat
0.07
(6.23)
-0.014
(-6.18)
-0.001
(-1.32)
0.007
(0.68)
0.402
(13.5)
-0.002
(-6.92)
0.024
Coeff
T-Stat
0.092
(7.99)
-0.013
(-5.86)
-0.013
(-5.86)

0.002
(0.17)
0.32
(10.1)
-0.002
(-6.35)
-0.005
(-1.14)
-0.071
(-9.30)
-0.053
(-6.17)
-0.012
(-1.47)
-0.0004
(-0.05)
0.013
(3.54)
0.02
(5.19)
0.006
(1.54)
0.04

Panel B: Developed markets
Coeff
T-Stat
0.087
(18.69)
-0.016
(-7.67)
0.004
Coeff
T-Stat
0.063
(5.66)
-0.012
(-5.43)
-0.001
(-0.90)
0.012
(1.23)
0.377
(12.5)
-0.002
(-7.43)
0.022
Coeff
T-Stat
0.09
(7.73)
-0.011
(-5.04)
-0.001
(-0.93)
0.005
(0.54)
0.284
(8.78)
-0.002
(-6.80)
-0.008
(-1.92)
-0.071
(-9.44)
-0.052
(-6.02)
-0.011
(-1.40)
-0.001
(-0.14)
0.001
(2.76)
0.019
(5.07)
0.005
(1.37)
0.04

Table 5. Continued

Intercept AGE SIZE LEV RET
VOL
NUMEST DD ROE ROE(1) ROE(2) ROE(3) RET(1) RET(2) RET(3) Adj. R
2


Panel C: Emerging markets
Coeff
T-Stat
0.395
(5.96)
-0.141
(-4.12)
0.05
Coeff
T-Stat
0.729
(5.18)
-0.136
(-4.00)
-0.0229
(-3.18)
-0.186
(-1.25)
0.587
(2.58)
0.002
(0.85)
0.10
Coeff
T-Stat
0.711
(4.61)
-0.132
(-3.88)
-0.027
(-2.89)
-0.142
(-0.95)
0.493
(2.12)
0.002
(0.80)
-0.001
(-0.02)
-0.13
(-1.73)
-0.05
(-0.77)
-0.048
(-0.64)
0.046
(0.49)
0.132
(3.26)
0.06
(1.43)
0.02
(0.49)
0.12
Panel D: US market
Coeff
T-Stat
0.066
(19.70)
-0.015
(-9.69)
0.01
Coeff
T-Stat
0.035
(4.03)
-0.014
(-8.91)
0.0003
(-0.45)
0.043
(5.93)
0.269
(11.2)
-0.001
(-4.49)
0.03
Coeff
T-Stat
0.048
(5.31)
-0.013
(-8.31)
0.0001
(0.12)
0.38
(5.25)
0.241
(9.47)
-0.001
(-3.89)
-0.005
(-1.49)
-0.056
(-9.80)
-0.019
(-2.91)
-0.009
(-1.40)
0.002
(0.43)
0.007
(2.52)
0.017
(5.96)
0.013
(4.42)
0.05
Table 6. Learning environment and analyst forecast errors
The following simple ordinary least squares regression model is estimated to capture the
relationship between analyst forecast errors and firm age:
FE
i,t
= a + b.Size
i,t
+ c.Leverage
i,t
+ d.Return Volatility
i,t
+ e.Number of Analysts
i,t

+ f.ENVIRONMENT.AGE
i,t
+ g.ANTI.ENVIRONMENT.AGE
i,t
+
i,t
where FE
i,t
is analyst forecast error for firm i in year t, which is calculated as the (absolute)
difference between median forecasted EPS and the actually reported EPS scaled by the
actual EPS. Size is the natural log of the firms total asset. Leverage is the debt ratio.
Return Volatility is simple return volatility of each stock as defined by the standard
deviation of monthly returns during the observation year. Number of analysts involved in
predicting EPS for the relevant period is the proxy for analyst coverage. Age is defined as
the plain age (first year of appearance on the Datastream dataset). Separate regressions are
estimated for each learning environment. For insider trading law, Environment equals 1 if
insider trading law is enforced and 0 otherwise. Anti.Environement is the complement of
environment. Both environment and anti.environment are interacted with AGE. The
interactive variables are computed analogously for the other two learning environment
features. For shortsell feasibility, environment equals 1 if shortselling transactions are
allowed and 0 otherwise. For foreign trading, environment equals 1 if foreign institutional
traders are active in the countrys market and 0 otherwise. All variables of firms in each
country are measured in its own currency. There are 20,416 firm-year observations in our
Datastream-IBES merged sample. We use White-adjusted standard errors to calculate t-
statistics reported in the parentheses.
Analyst Errors
when Insider
trading law is
enforced
Analyst Errors
when Shortselling
is feasible
Analyst Errors
when Foreign
trading is above
median
Intercept 0.115
(9.50)
0.114
(9.41)
0.116
(9.79)

Size -0.016
(-8.28)
-0.015
(-7.46)
-0.016
(-8.47)

Leverage 0.031
(3.67)
0.027
(3.19)
0.046
(5.51)

Return Volatility 0.516
(21.12)
0.493
(19.99)
0.475
(19.87)

Number of Analysts -0.001
(-3.94)
-0.001
(-4.55)
-0.001
(-2.54)

ENVIRONMENT*AGE -0.005
(-2.62)
-0.006
(-3.24)
0.101
(37.85)

ANTI.ENVIRONMENT
*AGE
0.077
(16.91)
0.062
(12.15)
-0.010
(-5.24)

Adjusted R-squared

0.05 0.04 0.10
Table 7. Incremental effect regression: Impact of learning environments on valuation

We define Equilibrium Valuation Speed as the rate of change of M/B ratio (i.e.,
log(M/B)
t
- log(M/B)
t-1
) and regress it on various explanatory variables focusing on
firms age and the learning environment per the methodology of He and Ng (1998):

Equilibrium Valuation Speed = c
0
+ c
1
Age
i
+ c
d0
Environment + c
d1
Environment*Age
i

+ c
2
DD
i
+ c
3
LEV
i
+ c
4
SIZE
i
+ c
5
ROE
i
+ c
6
ROE(1)
i
+ c
7
ROE(2)
i
+ c
8
ROE(3)
i

+ c
9
RET(1)
i
+ c
10
RET(2)
i
+ c
11
D RET(3)
i
+ c
d2
E DIV
i
+ c
d3
E.LEV
i
+ c
d4
E.SIZE
i

+ c
d5
E ROE
i
+ c
d6
E ROE(1)
i
+ c
d7
E ROE(2)
i
+ c
d8
E ROE(3)
i
+ c
d9
E RET(1)
i

+ c
d10
E RET(2)
i
+ c
d11
E RET(3)
i
+
i

where Age and other base variables retain their definitions from Table 3 and interactive
variables are obtained by multiplying the value of Environment variable with the base
variable. Environment (E) represents the learning environment indicator variable as
defined in Table 6. For example, E equals 1 if insider trading law is enforced in a given
country in a given year and 0 otherwise and then that value is assigned to all applicable
firm-year observations. All variables of firms in each country are measured in its own
currency. There are 9,640 firms (68,034 firm-year observations) with valid data for the
whole sample, and 6,631 and 3,009 representing developed and emerging markets
respectively. For brevity, we report only three regression coefficients, AGE, E, and
AGE*E. All t-statistics reported in parentheses are based on clustered standard errors as
suggested by Petersen (2009).

Valuation Speed AGE E = Learning
environment
E*AGE Adj. R
2
Panel A: All countries
Insider trading law enforced -0.217
(-7.02)
0.039
(1.71)
-0.16
(-3.97)
0.27
Shortselling feasible -0.631
(-12.63)
0.068
(1.81)
0.338
(6.22)
0.27
Foreign trading -0.449
(-16.65)
0.108
(3.68)
0.169
(4.20)
0.27
Panel B: Developed markets
Insider trading law enforced -0.078
(-2.88)
0.095
(3.40)
-0.237
(-6.32)
0.29
Shortselling feasible -0.04
(-0.54)
0.03
(0.06)
-0.253
(-3.25)
0.28
Foreign trading -0.389
(-14.25)
0.018
(0.59)
0.188
(4.68)
0.29

Panel C: Emerging markets
Insider trading law enforced -0.477
(-6.03)
-0.346
(-4.03)
-0.398
(-3.18)
0.24
Shortselling feasible -0.88
(-13.65)
-0.112
(-0.85)
0.518
(3.13)
0.22
Foreign trading -0.707
(-9.14)
0.67
(5.28)
0.002
(0.01)
0.25